Crush margin stays wide despite decent canola prices

The ICE Futures canola market was strong during the first week of October, but ran into resistance from a chart perspective.

The November contract was hard pressed to move above $530 per tonne, despite trading just below the psychological point on a number of occasions. A break above there would set the stage for a retest of the September high around $535.

Solid demand from both exporters and domestic crushers paint a supportive fundamental picture for canola. The latest Canadian Grain Commission numbers show canola exports during the crop year to date running about half a million tonnes ahead of the 2019-20 pace, with 1.9 million tonnes exported during the first two months of the crop year. The domestic crush was right in line with the year-ago level, at 1.7 million tonnes.

Canola remains cheap compared to other oilseeds, as evidenced by crush margins topping $100 per tonne this week. That’s an improvement of about $20 over the past month, and well above the average margins seen over the past year. That means processors should be making more money crushing canola, even though seed prices are high.

However, it will take ongoing strength in outside markets to sustain any rally. That strength would most likely come from the Chicago Board of Trade soy complex, which saw soybeans hit new contract highs during the week.

Canola usually lags soybeans both to the upside and to the downside, and should remain a follower going forward. That means whatever moves soybeans will indirectly move canola as well.

Key factors to watch on the soybean front are U.S. exports and South American production. China has been on a tear over the past month, buying up large amounts of U.S. soybeans. The question now is whether or not that demand will continue, or if it was all front loaded to the marketing year to meet trade deal requirements.

Dryness in Brazil has hampered the seeding of its next soybean crop, which has contributed to the strength in U.S. futures. However, a few timely rains would quickly change the story in Brazil. If Brazilian production prospects improve, China could easily cancel U.S. purchases and return to buying cheaper Brazilian beans.

Wheat futures posted some impressive gains during the week, hitting contract highs in many months. While Minneapolis spring wheat was not showing the same strength as the winter wheats, it eventually found some stability as well. Much of the latest bullish activity in wheat was tied to drought concerns in both the Black Sea region and in parts of the U.S. Plains.